With its growing financial strength, India is vulnerable to money laundering activities even though the country’s strict foreign exchange laws make it difficult for criminals to launder money.

Prevention of Money Laundering Act, 2002

The aforesaid Act was enacted to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering. The Act extends to the whole of India including J&K.

Financial Intelligence Unit – India (FIU-IND)

Financial Intelligence Unit – India (FIU-IND) was set by the Government of India as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions.

FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in pursuing the global efforts against money laundering and related crimes. FIU-IND is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

Role of Reserve Bank of India

The regulatory purview of the Reserve Bank extends to a large segment of financial institutions, including commercial banks, co-operative banks, non-banking financial institutions and various financial markets. The Board for Financial Supervision (BFS) continues to exercise its supervisory role over those segments of the financial institutions that are under the purview of the Reserve Bank.

Recently, the RBI has issued a series of master circulars to the banks, about the precautions to be exercised in handling their customers’ transactions. Important amongst these is a guidance note issued about treatment of customer and key to knowing the customer. The identity, background and standing of the customer should be verified not only at the time of commencement of relationship, but also be updated from time to time, to reflect the changes in circumstances and the nature of operations of the account.

Role of Securities Exchange Board of India

Indian securities market is also prone to money-laundering activities. Intermediaries registered under the SEBI are under reporting obligation of PMLA. FIU-IND has also issued certain guidelines relating to KYC to be followed by these intermediaries.

The main source of money-laundering would be the Participatory Notes Transaction and Overseas Direct Investment Routes.

The PN/ODI route and its cover of anonymity is being used by certain entities without there being any real time check, control and due diligence on their credentials. Such a lapse has very grim portents as far as the market integrity and interest of investors are concerned.

SEBI has almost taken a full circle on the issue of Participatory Notes. SEBI has taken certain important measures in favor of the Foreign Institutional Investors (FII) as well as the unregistered foreign investors who intend to invest in the Indian Securities market. KYC norms are now mandatory in order to do P-notes transactions in Indian market.

Suggested Measures

• The Government of India should move forward expeditiously with amendments to the PMLA that explicitly criminalize terrorist financing, and expand the list of predicate offenses so as to meet FATF’s core recommendations.
• Further steps in tax reform will also assist in negating the popularity of hawala and in reducing money laundering, fraud, and financial crimes.
• The GOI should ratify the UN Conventions against Transnational Organized Crime and Corruption.
• The GOI needs to promulgate and implement new regulations for non government organizations including charities.
• Given the number of terrorist attacks in India and the fact that in India hawala is directly linked to terrorist financing, the GOI should prioritize cooperation with international initiatives that provide increased transparency in alternative remittance systems.
• India should devote more law enforcement and customs resources to curb abuses in the diamond trade.
• It should also consider the establishment of a Trade Transparency Unit (TTU) that promotes trade transparency; in India, trade is the “backdoor” to underground financial systems.
• The GOI also needs to strengthen regulations and enforcement targeting illegal transactions in informal money transfer channels.